Alameda and the Road Ahead for the California Rule
| Publication year | 2020 |
| Author | By Isabel C. Safie and Allison M. De Tal |
By Isabel C. Safie and Allison M. De Tal
Isabel C. Safie is a Partner at Best Best & Krieger, LLP whose practice focuses on employee benefits, including pensions and other post-employment benefits, and tax, with a focus on employment, income and excise taxes, and tax-exempt entities. Allison M. De Tal is Of Counsel at Best Best & Krieger, LLP with nearly a decade of experience in tax and employee benefit matters.
The California Rule, also referred to as the vested rights doctrine, is a longstanding principle of California case law that recognizes public employees' contractual rights to pension benefits that generally cannot be impaired once employment begins. Many cases have suggested that changes can be made in limited circumstances if certain requirements are met; but the bar has been considered insurmountable by many.
The California Rule can be traced back to the late 1940s, with the Kern v. City of Long Beach1 decision. Since then, there have been numerous cases that address the California Rule and the changes that can be made to public employees' benefits—particularly in recent years with the 2012 passage of Assembly Bills 340 and 197 (collectively referred to herein as the Public Employees' Pension Reform Act (PEPRA)).2
Alameda County Deputy Sheriff's Association v. Alameda County Employees' Retirement Association3 (Alameda) was highly anticipated, particularly on the heels of the 2019 decision in Cal Fire Local 2881 v. California Public Employees' Retirement System4 (Cal Fire). The California Supreme Court was urged to utilize the Cal Fire decision as a platform to address the California Rule, but it declined to do so concluding that the ability to purchase additional retirement service credit, or air time, was not protected by the California Rule.
In Alameda, modifications made to the County Employees' Retirement Law (CERL) by PEPRA were challenged by members of retirement systems in Alameda, Contra Costa, and Merced counties.
The vast majority of PEPRA's provisions only apply to "new members" or, generally, employees who become members of a public retirement system on or after January 1, 2013. However, the provision at issue in Alameda is much different. It is one the few provisions that applies to all members of county retirement systems—including those that are "legacy members," or those that established membership prior to January 1, 2013. Specifically, PEPRA amended California Government Code Section 31461 (Section 31461), a provision applicable only to county retirement systems. As amended by PEPRA, Section 31461 excludes the following types of compensation from "compensation earnable," one of the metrics used to the calculate pension benefits:
- compensation deemed to be paid to enhance retirement benefits (e.g., in-kind benefits converted to cash, termination pay received prior to separation, and one-time payments not made to all similarly situated employees);
- the cash value of accrued leave except that earned and payable during the final compensation period;
- payments for services rendered outside normal working hours; and
- amounts paid after employment termination.
Legacy members filed suit alleging that they had a contractual right to receive pension benefits calculated without regard to the modifications to Section 31461. First, these plaintiffs asserted that the changes were a violation of their contractual rights under various settlement agreements. Second, the plaintiffs asserted that the changes PEPRA made to Section 31461 were barred by equitable estoppel. Finally, they argued that the changes violated their rights under the constitutional contract clause (i.e., the California Rule).
The Court first considered whether the modifications to Section 31461 violated contractual rights based on settlement agreements entered into prior to PEPRA. These settlement agreements resolved lawsuits brought following the 1997 decision in Ventura County Deputy Sheriffs' Association v. Board of Retirement of Ventura County Employees' Retirement Association5 (Ventura) in which the Court adopted a broad interpretation of compensation earnable. The lawsuits that followed Ventura challenged how pension benefits were calculated prior to that decision, and the settlement agreements addressed in Alameda resolved the types of compensation that were to be included in compensation earnable with the retirement systems' agreement to include items that had previously been excluded in the calculation of pension benefits.
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The Court concluded that county retirement boards cannot administer their pension systems in a manner that conflicts with Section 31461, as amended by PEPRA. The settlement agreements would confer on retirement system members pension benefits that were based, in part, on pay items excluded by PEPRA. As such, the Court concluded that the retirement systems could not continue to calculate pension benefits in accordance with the settlement agreements as of January 1, 2013.
The Court then considered whether the plaintiffs in Alameda could assert a claim for equitable estoppel to...
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